Canada: Tax Court Decision Affecting Resource Partnerships

Last Updated: November 12 2007

Article by Ted Thiessen, © 2007, Blake, Cassels & Graydon LLP

Originally published in Blakes Bulletin on Energy - Oil & Gas, October 2007

In Penn West Petroleum Ltd. v. The Queen, 2007 TCC 190 (Penn West) the Court applied the income reallocation provision in subsection 103(1) of the Income Tax Act, R.S.C. 1985, c.1 (Canada) (Tax Act) by holding that an allocation of proceeds to one partner in the Penn West Petroleum partnership, in accordance with the terms of the agreement governing the partnership (the Partnership Agreement), was not reasonable in the circumstances, and accordingly reallocated the proceeds to all of the partners in proportion to their respective partnership interests. The October 2007 Blakes Bulletin on Tax provides an in-depth analysis of the judgment. What follows here is a high-level summary of the key facts of the case and the conclusions reached by the Court.

On February 17, 1994, PetroCanada sold its interest in certain producing properties (the TroCana Assets) for approximately CAD 170 million to two subsidiaries (the PetroCanada Subsidiaries) following which the TroCana Assets were subsequently contributed, on a tax-deferred basis, to a partnership formed between the PetroCanada Subsidiaries.

On April 22, 1994, the appellant, Penn West Petroleum Ltd. (Penn West) acquired the shares of the PetroCanada Subsidiaries for CAD 170 million. On July 1, 1994 Penn West transferred its own oil and gas properties to the partnership and renamed it the Penn West Petroleum partnership. Penn West subsequently transferred its interest in the PetroCanada Subsidiaries owning 97% of the Penn West Petroleum partnership (the Majority Interest Partner).

On December 29, 1994, Penn West entered into a letter agreement to sell some units to Phillips Petroleum Resources Ltd. (Phillips). The sale of the TroCana Assets triggered an ROFR in favour of Phillips, Suncor Inc. and B.C. Star Partners. Phillips decided to exercise its rights under the ROFR to acquire a portion of the TroCana Assets known as the "Blueberry Assets". In order to accomplish the sale, the Majority Interest Partner agreed to sell a 5.27% interest in the partnership to Phillips for CAD 14.1 million. Phillips could then take possession of the assets by relying on certain existing clauses in the Partnership Agreement which allowed a partner to cause the partnership to redeem such partner’s units in exchange for a specified interest in any one or more of the partnership properties designated by such partner. The Partnership Agreement further provided that any income or loss realized, or proceeds of disposition deemed to be received, by the partnership as a result of such a distribution of partnership property would be allocated to the partners to which the distribution was made. Such a clause is common in resource partnerships and, as was noted by Chief Justice Bowman in his decision, it essentially attributes to a partner to whom property of the partnership is distributed the income tax consequences of such distribution with the net result that the partner acquires the resource property distributed without tax pools. This type of transaction has been utilized in transactions where the vendor is short on tax pools.

On February 24, 1995, the Blueberry Assets were transferred to Phillips in satisfaction of Phillips’ interest in the partnership. In accordance with the provisions of the Partnership Agreement, Phillips was allocated all of the proceeds of the disposition deemed to have been received by the partnership as a result of the transfer. The Minister of National Revenue reassessed Penn West on the basis that it should have been allocated 92.82% of the proceeds allocated to Phillips, in accordance with Penn West’s interest in the partnership on the date that Phillips withdrew as a partner.

The Tax Court found that the issue in question was "whether the entire deemed proceeds of the disposition of the Blueberry assets can be allocated to Phillips for tax purposes by reason of article 3.17 [of the Partnership Agreement] despite the fact that for balance sheet purposes Phillips had only a 5.27% interest" (para. 26). Specifically, the issue was whether the allocation of the proceeds of disposition of the Blueberry Assets to Phillips contravened subsection 103(1) of the Tax Act, which reads as follows (emphasis added):

(1) Where the members of a partnership have agreed to share, in a specified proportion, any income or loss of the partnership from any source or from sources in a particular place, as the case may be, or any other amount in respect of any activity of the partnership that is relevant to the computation of the income or taxable income of any of the members thereof, and the principal reason for the agreement may reasonably be considered to be the reduction or postponement of the tax that might otherwise have been or become payable under this Act, the share of each member of the partnership in the income or loss, as the case may be, or in that other amount, is the amount that is reasonable having regard to all the circumstances including the proportions in which the members have agreed to share profits and losses of the partnership from other sources or from sources in other places.

In finding the allocation at issue to be unreasonable in the circumstances, Bowman C.J. cites a number of facts he considered material. According to Bowman C.J., the allocation clause of the Partnership Agreement "may have had its genesis" (emphasis added) in a desire to allocate proceeds of disposition back to a partner that had contributed assets into the partnership on a tax-deferred basis under s. 97(2) of the Tax Act. Since Phillips had not contributed assets to the partnership, this rationale for the allocation provision did not apply to it. In a separate part of the Reasons for Judgment, the Court expressly rejects the argument raised by counsel for Penn West that the existing clause of the Partnership Agreement permitted the assets to be extracted and the income to be allocated on the basis undertaken. According to Bowman C.J., the Partnership Agreement was amended "to permit Phillips to designate the properties (presumably the Blueberry assets) that it wanted to take out of the partnership".

The trial decision (which, it is understood, has been appealed to the Federal Court of Appeal) has raised considerable uncertainty with respect to the proper application of allocation clauses such as the one at issue in Penn West. For an in-depth analysis of the decision and a detailed discussion of its possible implications, please refer to the case comment contained in our October 2007 Blakes Bulletin on Tax, Penn-West Decision Reallocates Partnership Income.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Events from this Firm
27 Oct 2016, Seminar, Toronto, Canada

Please join members of the Blakes Commercial Real Estate group as they discuss five key provisions of a commercial real estate purchase agreement that are often the subject of much negotiation but are sometimes misunderstood.

1 Nov 2016, Seminar, Toronto, Canada

What is the emotional culture of your organization?

Every organization and workplace has an emotional culture that can have an impact on everything from employee performance to customer or client satisfaction.

3 Nov 2016, Seminar, Toronto, Canada

Join leading lawyers from the Blakes Pensions, Benefits & Executive Compensation group as they discuss recent updates and legal developments in pension and employee benefits law as well as strategies to identify and minimize common risks.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.